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ACC 411: Financial Statement Analysis

Graded Case Assignment


Team 18:
Aishwarya Chandok
Duan (Emma) Dihang
Shaiyanne Mall
Weigang (Leo) Ning

Q1. Forecasting

Below are the assumptions we used while forecasting F/S statement for Family Dollar (Status Quo :
No changes in efficiency and profitability)

The report mentions that that Family Dollar planned to open approximately
500 stores by early 2013. However, the market was getting saturated and
was beginning to slow down. As the case mentions, Family Dollar was the
No of New Stores most hit, it was opening new stores yet EBIT was flat. Given the situation it is
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(Forecasted) safe to presume that sale per store was on the decline. Therefore, we
project that Family dollar would continue to open new stores, but it would
do so at a decreasing rate. This model assumes that the number of new
store openings decrease by 15 each year through 2019.
We can notice from the income statement that the growth rate for same
store growth rate had been declining since 2012 and became negative in
Forecasted 2014 signaling losses. In this forecast it is projected that the growth will
growth rate for eventually get back to positive, given the fact that after the merger, there
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sale per store for will be divestures of stores and the new management would be more
existing store efficient in managing the store. Therefore this model increases the growth
rate by 1 percent ultimately putting the growth trajectory back on track to
3% in 2019.
Sales per store for The model assumes that the new stores will follow the same growth path as
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new stores the existing stores.
The model assumes thatthe new stores will not immediately start generating
Total forecasted
revenue equivalent to existing stores. They will catch up eventually however
4 sale per store for
in the forecast period it is assumed that sale per store for new stores (Mid-
new store
year opening) would generate 80% of the sales of an existing store
The model assumes that half of the new stores open mid year and the rest
No of New stores
after a six month period such that on an average one new store opens every
5 taken into
month. However for projecting sales the model only considers the first half
consideration -
of the new stores in calculation. (This is due to the fact that new stores will
For sales not have generated significant revenue due to limited operation before
Projection forecasting valuation)
Restructuring The model assumes that after the merger it takes the firm a few years to
Charges/Sale and restructure itself, therefore the model gradually decrease the merger and
6 Merger & restructuring charge and eventually makes it zero. Similarly when the firm
Restructuring undergoes restructuring, it takes a few year to obtain an efficiency level. The
Charges/Sale model also phases out this expense gradually to zero.
No Change in
7 Profitability and For the first case we assume no change in efficiency and profitability
Efficiency
Based on the forecasted amounts, the asset side of the B/S will never equal
the liabilities and stockholders’ equity side. As a result, we have to plug for
something to make the B/S balance. We assume/prefer plugging for “net”
Plug for Net
8 common stock. This means that common shares will be issued if there is a
Common Equity
cash shortfall to fund the firm’s growth, or that common shares will be
repurchased if there is more cash generated internally than is needed to
fund the firm’s growth

Q4. How does your forecasted performance over the next five years compare with Family Dollar’s
performance for the time period up through 8/31/2014?

A.

In our first scenario with no changes in efficiency or profitability, our ROE is 18.63% at the start of the
forecast period and then steadily climbs up to 21.87% in the terminal year. This is simply due to that
sales occurring at a more larger scale bringing in more cash flow for equity holders.

The historical 5 years on the other hand saw an ROE of 30.96% in 2011 which slowly fell to 17.43% in
2014. Considering how sales continued to increase throughout the period from 2011-2014 the only
reasonable explanation why ROE fell was that the expenses as a % of sales were rising and margins were
shrinking.